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Friday's Tips
February 4, 2011
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Dear subscriber,
As a registered user, you are privy to our newsletters, Friday's Tips, Monday Analysis, news alerts and merger announcements before they hit it big. These updates provide valuable information to help investors and potential investors evaluate specific industries and companies.
Sincerely,
Newsletter Administrator
Mina Mar Marketing Group
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| Mina Mar Group Commentary and Opinion | China M&A Tax Issues - Installment 2: Ordinary versus Special Reorganizations in Share Deals and Asset Deals
By Jennifer Ding
http://www.minamargroup.net/support/index.php?_m=downloads&_a=viewdownload&downloaditemid=1887&nav=0,18,71,72
The M&A rules recognize a deal as either an ordinary reorganization or a special reorganization, and different tax treatments apply accordingly. In terms of acquisitions, the major difference in tax treatment between ordinary and special reorganizations is the tax basis used for calculating the gain/loss from the transaction and the time point at which this gain/loss is recognized. Furthermore, according to Article 7 of the M&A rules, an acquisition between a domestic Chinese enterprise and a foreign enterprise (which in this case includes those domiciled in Hong Kong, Macao and Taiwan) must meet one of the additional conditions below in order to qualify as a special reorganization1[1]:
- The foreign enterprise transfers its equity in domestic enterprise to its wholly-owned subsidiary (also a foreign enterprise), the income withholding tax burden is not changed by the transaction and the transferor promises in writing to the relevant tax authority that it will not change its equity holdings in its said wholly-owned subsidiary for 3 years.
- The foreign enterprise transfers its equity in a domestic enterprise to its wholly-owned subsidiary that is also a domestic enterprise.
- The domestic enterprise that is a wholly-owned subsidiary of a foreign enterprise invests its assets/equity in its parent. In this case, the domestic enterprise can allocate its taxable income from the transaction over 10 years.
- If the acquisition satisfies none of the above three conditions, approval must be obtained from the Ministry of Finance and the SAT in order to enjoy tax treatments given to special reorganizations.
Equity Acquisitions
One of the two typical methods in which foreign investors can acquire a domestic non-foreign-invested Chinese enterprise is through an equity deal, which involves buying the equity of the target company or increasing the capital of the target company in order to transform it into a foreign-invested company and establish control (the foreign investor must contribute more than 25% of the registered capital of the domestic enterprise in order to take advantage of special treatments only given to foreign-invested enterprises in China).2[2] Liabilities will be inherited with the target company in an equity acquisition since the legal entity remains unchanged.
In terms of the tax issues involved in an equity deal that is considered an ordinary reorganization, the M&A rules require that the post-transaction fair market value be the tax basis of the equity or assets transferred. If the shareholder is a foreign enterprise, then the tax rate on an equity transfer is 10%. For special reorganizations, however, the tax basis of the acquired equity or assets is the seller's pre-transaction tax basis in the equity or assets. For example, if the seller originally purchased the target company for $2 million, and the buyer presently acquires the target company from the seller for $3 million, then the buyer's tax basis is $3 million in an ordinary reorganization but only $2 million in a special reorganization. This difference in tax treatment for special reorganizations prevents any taxable gain from arising and allows the seller's original purchase price to remain as the tax basis for further sales of the equity or assets.
The EITL dictates that accretions or dilutions in the value of equity or assets are recognized at the time of execution for an ordinary reorganization. The amount recognized is that between the fair market value and the pre-transaction tax basis of the equity and assets transferred. In a special reorganization, the acquirer can defer the gain or loss derived from the transaction except for those related to non-equity payments, which is calculated as the difference between the fair market value and the pre-transaction tax basis of the equity/assets multiplied by the proportion of the fair market value of equity/assets that is non-equity.3[3]
Lastly, VAT or business tax will not be levied on an equity transfer. China's rules on stamp duty, however, require a 0.1% stamp duty on the sale price of the share transfer.4[4] After a transaction is completed, the acquirer's acquisition expenses cannot be deducted by the target company. These include interest expenses incurred for loans used for the acquisition, which will be capitalized into the costs of the asset according to the EITL Implementation rules. The target company's losses are permitted to be carried forward for up to 5 years.5[5] Furthermore, the tax basis of assets of the target company remains unchanged after the deal.
Asset Acquisitions
The other way in which many foreign investors take over domestic Chinese enterprises is through an asset deal, which involves the formation of a new foreign-invested legal entity in China through which the foreign investor buys and operates the assets of a domestic enterprise, or the purchase of the assets of a domestic enterprise, which are then used to create a foreign-invested enterprise in China.6[6]
The asset acquirer in deals that are considered special reorganizations also enjoy the advantage of being subject to the pre-transaction tax basis in those assets. The differences in timing of the recognition of gain or loss from the transaction between ordinary and special reorganizations are the same as those in equity deals.
The tax cost of the assets is their purchase price. Foreign enterprises are subject to a 10% tax. VAT on fixed assets is at 17%, while business tax on intangible assets is at 5%. Deed tax of 3%-5% is levied on the sale of land or real estate. Stamp duty is 0.03%-0.05% of the sale price of the assets transferred. Unlike in equity deals, the losses of the target company in an asset deal cannot be carried forward. Finally, interest expenses incurred during the asset acquisition and by the newly established entity will be capitalized and depreciated over the life of the assets.
Conclusions
Choosing a deal structure to achieve tax efficiency thus depends on the particular set of circumstances surrounding the acquisition. For example, the tax burden in an asset deal may not be excessive if the target company does not hold a large amount of real estate and thus is not subject to the deed tax. Furthermore, in maximizing tax saving opportunities, deductions on interest expense or other tax benefits associated with different financing structures should also be taken into consideration. Of course, it also must be taken into consideration that in China, certain restrictions on foreign ownership of domestic companies in industries such as mining, pharmaceuticals and insurance prevent equity deals from being transacted.
7[1] "Notice of the Ministry of Finance and the State Administration of Taxation on Several Issues Concerning the Enterprise Income Tax Treatment on Enterprise Reorganization (No.59 [2009] of the Ministry of Finance)" (the M&A rules), Article 7.
8[2] "The Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors (No. 10 [2006])," Articles 2 and 9.
9[3] "China Mergers, Acquisitions and Reorganization Tax Guide," Deloitte China Practice, 2009, http://www.deloitte.com/assets/Dcom-China/Local%20Assets/Documents/Services/Tax/cn_tax_ChinaMARTaxGuide_040609(1).pdf.
10[4] "Provisional Rules of the People's Republic of China on Stamp Duty (Order of the State Council of the People's Republic of China (No. 11)," Article 2.
11[5] "Enterprise Income Tax Law of the People's Republic of China (Adopted at the 5th Session of the 10th National People's Congress of the People's Republic of China on March 16, 2007)" (EITL), Article 18.
12[6] "The Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors (No. 10 [2006])," Article 2. | |
| AGIJ | February 1: Axia Group Inc. (AGIJ; www.axiacorporation.com) CEO Michael Arnkvarn updated shareholders on the purchase of Collagenna Skin Care Products, new management and other company developments. Negotiations are ongoing with several potential new business partners, with the goal of maximizing market opportunities and increasing revenues. The company continues to develop its business model and its updated website at www.collagenna.com reflects this new vision.
AGIJ has also hired Mina Mar Marketing Group as its investor relations (IR) team. | |
NWTT
| February 4: NW Tech Capital Inc. (NWTT; www.nwtechcapital.com) has shared more details of the company's previously released geological report by releasing a video featuring geological consultant Jim Atkinson. The company invites its followers to review these videos to better understand and localize the potential of the property. The videos are available at http://minamargroup.com/NWTTmining/.
The new company management continues to seek new mining ventures to expand its portfolio of properties with confirmed findings of precious metals.
February 3: NWTT announced that its Canada Corp. subsidiary will soon share more details of the company's previously released geological report by posting a video featuring geological consultant Jim Atkinson on the Mina Mar Group website (www.minamargroup.com/NWTTmining). The website link will be made active once the video is published.
Mr. Atkinson, a well-respected professional geologist (P.Geo), reviewed Canada Corp.'s New Millennium Property in northwestern Ontario, which is located 20 kilometres east of Sioux Lookout. Mr. Atkinson uses the video to further explain and elaborate on the locale's findings, and offers an in-depth description of the property and its history, details on previously explored areas, surrounding mining operations and the sites with the most potential for gold discovery and profitable mining.
Canada Corp. believes that under the guidance of Mr. Atkinson's report, the company will be able to significantly speed up the exploration process and target the most promising areas of the property where there is a proven gold presence. | |
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TITL
| February 3: Title Consulting Services, Inc. DBA Accu Title Agency (TITL; www.titleconsultingservices.com) presented the business model of its potential targeted merger candidate: a company with browser-based web-conferencing software that allows anyone to meet online effortlessly and affordably. TITL expects to close this merger within 21 days. It will expand and enrich its current title insurance business with this new high-tech venture. TITL will disclose the merger candidate's name and details to its followers shortly.
TITL has been made aware of a Florida-based quasi-analyst publicly stating that, amongst other things, TITL's operations are not viable. The company's litigation attorneys are taking appropriate measures in this matter. Management asks followers to focus on official company postings only, and not random, self-serving statements from questionable online blogs with hidden agendas.
January 28: TITL announced progress in the development of its smart phone application for Apple(R) iPhone(TM), iPod Touch(TM), iPad(TM) and other mobile platforms, including the Android(TM) platform developed by Google(R). The company has started a venture with Impiger Technologies Inc. (www.impigermobile.com) as part of this process, which TITL sees as a small step in its goal to align technology with the real estate and mortgage industries. | |
| VCTY |
January 31: Videolocity International, Inc. (VCTY; www.videointernationalcorp.com) announced that it had closed the sale of its Avatar Singh Construction subsidiary (ASCC) and that there could be a possible distribution for VCTY shareholders. The sale of ASCC is being conducted on an all-stock basis and could yield VCTY several million dollars in profits.
VCTY's Tactician University announced that it had organized a seminar with the Chinese Academy of Social Sciences Urban Development and Environmental Research Institute to promote regional economic development in China.
January 28: VCTY announced that a deal to sell its Avtar Singh Construction (ASCC) subsidiary to Evader Inc. (EVDR; www.evadercorp.com) was in place and that the transaction was expected to close within 10 days once all of the involved parties finalized the logistics of this sale.
January 27: Tactician University announced its involvement in a conference on modernizing the Chinese city of Zhengzhou's industrial system. Zhengzhou is the capital of Henan province and serves as its political, economic, technological and educational centre. The city of 7.4 million people is a major transportation hub for central China.
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| Micro Tips | ADHC
The market is still waiting to recognize the potential of this venture. The stock price is not reflecting the values as the company's platform development moves forward. The company has also been short-sold over a period of time, and the stock movement reflects it. We believe that this stock and company business model is a great one and we're working with management on how to best address the stock movement. The company is also looking into some mergers, but holds its hand close to the chest. ADHC is a Pink Sheets company and operates as a full-blown reporting NASDAQ-type issuer. Very impressive. We met with the CEO this week to discuss ADHC's future plans, and we can say great things are on the horizon.
AGIJ
Following the merger with Collagenna, the company has regrouped and now returns to the public eye. We have been receiving regular updates from management about the company's business, R&D and all other developments. The company is growing organically in gaining its footing in the cosmetics market. We saw the company gather its funds and acquire a public company to be its sole subsidiary. We see a strong indication of a will to succeed, and Collagenna may move to a higher exchange as the business expands and the company secures adequate financing. If investors want a silent runner, they need to look no further. The company expects the overhang of former management to be absorbed by the market shortly. Someone painted AGIJ at the close, and the act looks vindictive.
Ottawa Business Journal picked up on the latest former management actions, but noted the interim management and not the ex-management as the culprit. You can read the article at http://www.obj.ca/?controllerName=author&id=3973&siteId=72.
AGIJ released this news: http://finance.yahoo.com/news/Axia-Group-Inc-AGIJ-Forward-iw-990939869.html?x=0&.v=1.
It appears that the Ottawa Business Journal regurgitated this news without first checking all the facts with the author of the original news release. The magazine identified Anthony Telez as the culprit. This is wrong and simply not so. Telez was the interim management. The release clearly states ex-management.
Threatened by a lawsuit from AGIJ and the preferred shareholders, a settlement was reached with the former management -- as outlined in the original press release. Telez has no position and was not involved in any wrongdoing that we are aware of. In our opinion, a retraction is in order. Ottawa Business Journal was notified of the error.
We advised Ottawa Business Journal that Mina Mar Group takes a very proactive small retail shareholders stance. You can find out more at http://www.ipetitions.com/petition/mmg/.
We expect a reply and a correction shortly.
EVDR
In our opinion, Evader Inc. wins the "Golden Spectacles Award" for most overlooked stock of the year. Please read the 2011 VCTY news to connect the dots.
FOGC
The Alta Mining merger is progressing well. Our best guess is that it will close anytime between now and the next 60 days. They are working out the logistics and internal operational matters. This is a done deal in our opinion.
GLGT
Regarding the status of the ZhiHua Co-Channel Hi-Tech Co., Ltd. merger, the Chinese company was ruffled by all of the "scam" non-existent comments made because the company had no website. We are conducting the first www.OTCVerify.com review on GLGT (a Chinese solar panel production company) and assisting in creating a new company website. The next steps of creating a special purpose corporation and receiving approval from the Chinese government are being worked on, and we expect the merger to come to a successful fruition. The company is hiring an additional IR rep in Hong Kong who will liaison with the Chinese company and be close to the action to report back to shareholders. The telephone number and name of the Chinese rep will be released shortly.
KING
We expect the company to start showing more activity shortly. The delay is compounded by the fact that management is out in the fields running the business 18 hours a day. We are getting our info as quickly as possible. Cressent Energy management has established a firm link with its IR and wants to make the most of becoming a publicly traded entity. The company shared some encouraging information about its potential regarding oil and gas. We will offer all details and developments as they unravel. Watch for KING to start releasing news frequently and rapidly once we compile all the data and obtain all supporting documentation.
NWTT
The company is regrouping to best carry out its spring exploration plans for northwestern Ontario's New Millennium gold mining property and the claims held by Joe Riives. It has created a geologist video presentation to further enhance the property's potential for NWTT shareholders.
The ornamental stone quarry deal is still on the table and may represent a vital project. Both companies can play to their strengths in a joined venture, creating a conglomerate with several revenue-generating facets to fuel exploration efforts. Management shows great flexibility, which should benefit the business and shareholders.
Management doesn't comment on its relationship with 1179785 Ontario Limited with respect to the New Millennium property and the claims held by Mr. Riives. NWTT started a share buyback program about a month ago when the stock price hit 0.0001. The company will not advise when it will stop or with what frequency it will continue to buy back shares. This company wants to fly and is one of the more aggressive clients.
TITL
We enjoy our co-operation with TITL management, as it is very open about its plans. The company's current business is steadily growing. TITL may not be a "jump up and run" type of stock, but management is doing its part to make its business more attractive to shareholders and continues to seek growth opportunities. This is another client that's a Pink Sheets company but operated as a full-blown reporting NASDAQ-type issuer. Very impressive and very transparent. The company is concerned about shareholder issues on a daily basis. We expect TITL to continue its market rally and attract more investors with future announcements. A name change is in the plans or being rumored as the company expands its vision into IT and the technology sector. It's on the cusp of a merger and we are lobbying the company to release the name of the targeted merger candidate over the weekend.
VCTY
Steady at the helm. The company keeps reporting business as usual, but we don't agree that its business is anywhere close to "usual." As a Chinese think tank, Tactician University continues to show immense ability to address and improve any form of issue, whether its organization, co-ordination, administration or politics. We think the sale of ASCC will profit the security and, if the company continues to keep its shareholder base well-informed, we may see more shareholder confidence.
Addressing a shareholder question regarding the company's potential hydro merger: If management decides to proceed on an all-cash basis, then 1.5 billion shares will be financed or used to get the cash. If it abandons the deal altogether then, yes, 1.5 billion shares come back to treasury or stay in escrow for another merger. It's one or the other, not both. The same scenario applies to the 300,000 shares for the acquisition of the video company. The company is hiring an additional IR rep in Hong Kong who will liaison with the Chinese company and be close to the action to report back to shareholders. The telephone number and name of the Chinese rep will be released shortly.
In the slow lane and if anyone still cares, Investors Hub is back in court again for contempt of court. This was rescheduled from December 31, when Investors Hub agreed to comply and pay the cash damages awarded. This time the company will be in court to show cause why management should not be subject to a committal warrant for allowing blasphemy, slanderous and erroneous postings to be removed, and to demonstrate that the employees of Investors Hub are not the actual posters dressed up as legitimate shareholders. The drama continues, but we feel that this lawsuit has demonstrated Investors Hub's true motives. We again remind followers that these chat boards are not a source of reliable investment advice and in this business there is a saying which states: "The one screaming 'Who's selling' is usually the one selling." Nothing irks a shareholder and us more then when someone sells something they don't own and make quick profits by exploiting others (AKA overselling or shorting).
In the passing lane:
- SKGO is working hard to close Textraw. This will be a nice deal with great momentum when announced.
- EEGI is making some moves on a business front by signing up deals. Great growth deal.
- UWRL should never be counted out. We took time to assess a useless lawsuit regarding some past doings of its ex-management. No treat here, and watch it as it starts to make its move with some nice announcements.
- ZMGD is on the cusp of securing some financing to close the USA merger, as previously announced.
- PTSH is courting several new operating merger companies. Looking at bio and health as possible candidates. Watch for SEC filings.
- RMDM is trying to address a massive overhang and is oversold. We're not ruling out a reverse split.
- SSYO is working on adequate disclosure documents to rid itself of its skull bones rank. A China merger is imminent.
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